Deck 5: Inventories and Cost of Sales

Question 1

The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each separate product.

Answer 1

True

Question 2

FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

Answer 2

True

Question 3

The matching principle is used to determine how much of the cost of goods available for sale is deducted from sales and how much is carried forward as inventory.

Answer 3

True

Question 4

Incidental costs for acquiring merchandise inventory, such as import duties, freight, storage, and insurance, should not be added to the cost of inventory.

Question 5

If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.

Question 6

The cost of an inventory item includes its invoice cost plus any added or incidental costs necessary to put it in a place and condition for sale, and minus any discount.

Question 7

Goods on consignment are goods shipped by their owner, called the consignor, to another party called the consignee.

Question 8

An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

Question 9

Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit and net income.

Question 10

One application of internal control when taking a physical count of inventory is the use of pre-numbered inventory tickets.

Question 11

A company must disclose any change in its inventory costing method in its financial statements.

Question 12

The LIFO method of inventory valuation can result in a company's ending inventory being valued at less than the inventory's replacement cost because LIFO inventory leaves the oldest costs in inventory.

Question 13

Most companies do not take a physical count of inventory each year, but rather rely on inventory records to determine the inventory value.

Question 14

In a period of rising purchase costs, LIFO usually gives a lower taxable income and therefore, yields a tax advantage.

Question 15

If obsolete or damaged goods can be sold, they will be included in inventory at their original cost.

Question 16

The full disclosure principle requires that the notes to the financial statements report any change in the method of accounting for inventory.

Question 17

Net realizable value for damaged or obsolete goods is sales price less the cost of making the sale.

Question 18

Goods in transit are automatically included in inventory regardless of whether title has passed to the buyer.

Question 19

An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.

Question 20

The consistency concept allows a company use different accounting methods from period to period in order to maximize profits.

Question 21

An inventory error is sometimes said to be self-correcting because it yields an offsetting error in the next period.

Question 22

Overstating beginning inventory will understate cost of goods sold and net income.

Question 23

An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

Question 24

The simple rule for inventory turnover is that a low ratio is preferable.

Question 25

The assignment of costs to the cost of goods sold and to ending inventory using FIFO is the same for both the perpetual and periodic inventory systems.

Question 26

Errors in the period-end inventory balance only affect the current period's records and financial statements.

Question 27

The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Question 28

An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

Question 29

A merchandiser's ability to pay its short-term obligations depends on many factors including how quickly it sells its merchandise inventory.

Question 30

When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple.

Question 31

The costs of goods purchased will vary under the different inventory methods of specific identification, FIFO, LIFO, and weighted average.

Question 32

An error in the period-end inventory balance will cause an error in the calculation of cost of goods sold.

Question 33

The inventory turnover ratio is computed by dividing cost of goods sold by average merchandise inventory.

Question 34

An understatement of the ending inventory balance will overstate cost of goods sold and understate net income.

Question 35

It can be expected that companies selling perishable goods have a higher inventory turnover than companies selling nonperishable goods.

Question 36

The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used.

Question 37

Determining the unit costs assigned to inventory items is one of the most important decisions in accounting for inventory.

Question 38

According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax reporting.

Question 39

LIFO assumes that inventory costs flow in the order incurred.

Question 40

The FIFO inventory method assumes that costs for the latest units purchased are the first to be charged to the cost of goods sold.

Question 41

The reliability of the gross profit method depends on a good estimate of the gross profit ratio.

Question 42

A company has inventory with a selling price of $451,000, a market value of $223,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $223,000.

Question 43

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Question 44

The lower of cost or market rule for inventory valuation is always applied to individual units separately rather than to major categories of inventory or to the entire inventory.

Question 45

In the retail inventory method of inventory valuation, the retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.

Question 46

To avoid the time-consuming process of taking an inventory each year, most companies use the gross profit method to estimate ending inventory.

Question 47

Using the retail inventory method, if the cost to retail ratio is 70% and ending inventory at retail is $145,000, then estimated ending inventory at cost is $207,143.
$145,000 * 0.70 = $101,500

Question 48

Goods in transit are included in a purchaser's inventory:

A)At any time during transit.
B)When the purchaser is responsible for paying freight charges.
C)When the supplier is responsible for freight charges.
D)If the goods are shipped FOB destination.
E)After the half-way point between the buyer and seller.

Question 49

Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between

A)beginning inventory and net purchases during the period.
B)ending inventory and beginning inventory.
C)net purchases during the period and ending inventory.
D)ending inventory and cost of goods sold.
E)beginning inventory and cost of goods sold.

Question 50

A company's total cost of inventory was $329,000 and its current replacement cost is $307,000. Under the lower cost or market, the amount reported should be $329,000.

Question 51

The choice of an inventory valuation method has little to no impact on gross profit and cost of sales.

Question 52

In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.

Question 53

In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost.

Question 54

The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.

Question 55

The conservatism constraint requires that when more than one estimate of the amounts to be received or paid in the future exists and these estimates are about equally likely, then the most optimistic amount is used.

Question 56

The lower of cost or market requiring inventory to be reported at market value if it is lower than cost is an example of applying the conservatism constraint.

Question 57

Under FIFO, the most recent costs are assigned to ending inventory.

Question 58

When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases at the point of each sale, rather than from the most recent purchases for the period.

Question 59

Damaged and obsolete goods that can be sold:

A)Are never counted as inventory.
B)Are included in inventory at their full cost.
C)Are included in inventory at their net realizable value.
D)Should be disposed of immediately.
E)Are assigned a value of zero.

Question 60

A company's cost of inventory was $219,500. Due to phenomenal demand the market value of its inventory increased to $221,700. This company should write up the value of its inventory according to the conservatism constraint.

Question 61

Physical counts of inventory:

A)Are not necessary under the perpetual system.
B)Are necessary to adjust the Inventory account to the actual inventory available.
C)Must be taken at least once a month.
D)Requires the use of hand-held portable computers.
E)Are not necessary under the cost-to-benefit constraint.

Question 62

The inventory valuation method that tends to smooth out erratic changes in costs is:

A)FIFO.
B)Weighted average.
C)LIFO.
D)Specific identification.
E)WIFO.

Question 63

Since an error in the period-end inventory causes an offsetting error in the next period:

A)Managers can ignore the error.
B)It is said to be self-correcting.
C)It affects only income statement accounts.
D)If affects only balance sheet accounts.
E)Is immaterial for managerial decision making.

Question 64

Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:

A)Prenumbered inventory tickets.
B)A manager confirms that all inventories are ticketed only once.
C)Counters confirm the validity of inventory existence, amounts, and quality.
D)Second counts by a different counter.
E)Counters of inventory should be those who are responsible for the inventory.

Question 65

The inventory valuation method that identifies each item in ending inventory with a specific purchase and invoice is the:

A)Weighted average inventory method.
B)First-in, first-out method.
C)Last-in, first-out method.
D)Specific identification method.
E)Retail inventory method.

Question 66

Bedrock Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available: • The ending inventory balance of $412,000 included $72,000 of consigned inventory for which Bedrock was the consignor.
• The ending inventory balance of $412,000 included $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year.
Based on this information, the correct balance for ending inventory on December 31 is:

A)$412,000
B)$340,000
C)$318,000
D)$362,000
E)$390,000

Question 67

An understatement of ending inventory will cause

A)An overstatement of assets and equity on the balance sheet.
B)An understatement of assets and equity on the balance sheet.
C)An overstatement of assets and an understatement of equity on the balance sheet.
D)An understatement of assets and an overstatement of equity on the balance sheet.
E)No effect on the balance sheet.

Question 68

The inventory turnover ratio:

A)Is used to analyze profitability.
B)Is used to measure solvency.
C)Reveals how many times a company sells its merchandise inventory during a period.
D)Reveals how many days a company can sell inventory if no new merchandise is purchased.
E)Calculation depends on the company's inventory valuation method.

Question 69

Which of the following inventory costing methods will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?

A)FIFO and LIFO
B)LIFO and weighted-average cost
C)Specific identification and FIFO
D)FIFO and weighted-average cost
E)LIFO and specific identification

Question 70

Acceptable methods of assigning specific costs to inventory and cost of goods sold include all of the following except:

A)LIFO method.
B)FIFO method.
C)Specific identification method.
D)Weighted average method.
E)Retail method.

Question 71

Days' sales in inventory is calculated as:

A)Ending inventory divided by cost of goods sold.
B)Cost of goods sold divided by ending inventory.
C)Ending inventory divided by cost of goods sold times 365.
D)Cost of goods sold divided by ending inventory times 365.
E)Ending inventory times cost of goods sold.

Question 72

Which of the following prescribes the use of the less optimistic amount when more than one estimate of an amount to be received or paid exists and the estimates are about equally likely?

A)Full disclosure principle.
B)Consistency concept.
C)FIFO inventory valuation method.
D)Conservatism constraint.
E)Matching principle.

Question 73

During a period of steadily rising costs, the inventory valuation method that yields the highest reported net income is:

A)Specific identification method.
B)Average cost method.
C)Weighted-average method.
D)FIFO method.
E)LIFO method.

Question 74

The understatement of the beginning inventory balance causes:

A)Cost of goods sold to be understated and net income to be understated.
B)Cost of goods sold to be understated and net income to be overstated.
C)Cost of goods sold to be overstated and net income to be overstated.
D)Cost of goods sold to be overstated and net income to be understated.
E)Cost of goods sold to be overstated and net income to be correct.

Question 75

Grays Company has inventory of 10 units at a cost of $10 each on August 1. On August 3, it purchased 20 units at $12 each. 12 units are sold on August 6. Using the FIFO perpetual inventory method, what amount will be reported in cost of goods sold for the 12 units that were sold?

A)$120.
B)$124.
C)$128.
D)$130.
E)$140.

Question 76

Buffalo Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available: • The ending inventory balance of $412,000 did not include goods costing $48,000 that were purchased by Buffalo on December 28 and shipped FOB destination on that date. Buffalo did not receive the goods until January 2 of the following year.
• The ending inventory balance of $412,000 included damaged goods at their original cost of $38,000. The net realizable value of the damaged goods was $10,000.
Based on this information, the correct balance for ending inventory on December 31 is:

A)$374,000
B)$384,000
C)$460,000
D)$422,000
E)$438,000

Question 77

Costs included in the Merchandise Inventory account can include all of the following except:

A)Invoice price minus any discount.
B)Transportation-in.
C)Storage.
D)Insurance.
E)Damaged inventory that cannot be sold.

Question 78

Decisions management must make in accounting for inventory cost include all of the following except:

A)Costing method.
B)Perpetual or periodic inventory system.
C)Customer demand for inventory.
D)Use of market values or other estimates.
E)Items included in inventory and their costs.

Question 79

If a period-end inventory amount is reported in error, it can cause a misstatement in all of the following except:

A)Cost of goods sold.
B)Gross profit.
C)Net sales.
D)Current assets.
E)Net income.

Question 80

On December 31 of the current year, Plunkett Company reported an ending inventory balance of $215,000. The following additional information is also available: • Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on December 28 with shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $215,000.
• Plunkett purchased goods costing $44,000 on December 29. The goods were shipped FOB destination and were received by Plunkett on January 2 of the following year. The shipment was a rush order that was supposed to arrive by December 31. These goods were included in the ending inventory balance of $215,000.
• Plunkett's ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Carole Company. (Plunkett Company is the consignee.)
• Plunkett's ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end.
Based on the above information, the amount that Plunkett should report in ending inventory on December 31 is:

A)$194,000
B)$209,000
C)$200,000
D)$171,000
E)$156,000